Transitioning into more transparency for trusts

2020 will be busy for clients and advisors as dawn of new information disclosure regime approaches

Transitioning into more transparency for trusts

The potential for financial crime has risen to unprecedented levels as technology enables more and more fraudulent schemes. But apart from that, there’s also a rising concern surrounding money laundering and tax evasion among government and taxing agencies around the world.

In an effort to tamp down such activity, there have been new international rules and regulatory frameworks to prevent apparently unfair exploitation of favourable tax rules, notably by multinational companies. Domestically as well, Canadian taxpayers who use trusts must prepare to lift the veil on some closely held details.

“[N]ew income tax rules have been introduced which require trusts (with limited exceptions) to provide additional information,” said Margaret R. O’Sullivan of O’Sullivan Estate Lawyers LLP in a recent note. “As well, certain trusts which may have had no reporting and disclosure obligations because they had no income will now be required to file a trust income tax and information return.”

With 2021 set to be the first reporting and disclosure year, 2020 will be the last opportunity for trustees and their professional advisors to review their structures and prepare accordingly. As noted by O’Sullivan, trusts that are used to hold a cottage, residence, or US vacation home, as well as those used to hold private company shares as part of an estate freeze, will have to file tax and information returns under the new rules.

“The information that must now be disclosed … will include the name, address, date of birth (if applicable) and tax identification number of the settlor, trustees and beneficiaries, as well as persons who have the ability to exert influence over trustee decisions, such as a protector,” O’Sullivan noted.

Taxpayers who fail to disclose, either knowingly or through gross negligence, will have to pay either $2,500 or 5% of the highest fair-market value of the trust’s assets, whichever is higher.

As Canada steps up efforts to leave behind its reputation as a secretive financial jurisdiction, difficulties may arise when the need to disclose runs up against privacy issues when obtaining details on beneficiaries. In particular, O’Sullivan cited difficulties in planning for trusts which have a class of contingent beneficiaries, who may not be aware of the trust or their status as beneficiaries.

“2020 will no doubt see a lot of activity as trustees prepare for the new rules, including winding up trusts where appropriate, such as those that are redundant and no longer serve a purpose, and obtaining the necessary information to make the disclosure come 2021,” she said.


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